End of the Recession

Paul Krugman has an insightful graph on his blog that shows what it means to have reached the end of the recession.

gdpgapIf you look at this, you see that actual GDP is no longer going down (technically, the end of the recession). However, GDP is not going up substantially, and we’re a long way from the earlier trend line – about 8% down according to Krugman.

I like the graph since it illustrates the end of the recession does not mean that all is rosy with the world. On the other hand, the earlier trend line leaps to mind as the “natural” order of things. It’s not. That trend line was fueled by your-home-as-an-ATM mentality, which was itself created by an unsustainable conundrum on Wall Street.

Incidentally, I’m convinced that no one really understands macroeconomics. When I have studied the field (in college at the undergraduate level and since then following Krugman, Delong and others), it appears to be some very smart people using some very strong math to create graphs like the one above. The results are NEVER counter-intuitive (the sole exception, David Riccardo’s Theory of Comparative Advantage). It’s fun stuff to study, but the fact is these are smart people creating equations and graphs to show to one another; they are not uncovering new, unexpected, verifiable results.

This is not to say macroeconomic study is useless, but it has less rigor than its practitioners would have you think. And they do create the data by which public policy is made.

Contrast this with a quantitative, microeconomic approach like Steven D. Levitt in Freakonomics, which results in some very surprising pieces of verifiable data. This is a real science. Unfortunately, it has little applicability for most public policy.

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